South Asia at a Crossroads: AI vs. Trade Deals

South Asia's economy is navigating a key moment, weighing the potential of new trade deals against the disruption from technology. While strong domestic demand and recent Free Trade Agreements (FTAs), like India's with the EU and UK, are set to fuel regional growth, artificial intelligence is profoundly changing job markets. The region faces the challenge of creating enough jobs for its growing workforce as skills needs shift, a problem made tougher by deep-rooted regional economic differences.

AI's Impact on Jobs and Growth Challenges

South Asia's economic growth is forecast to slow to 6.3% in 2026, down from an estimated 7% in 2025. The World Bank links this slowdown mainly to disruptions in global energy markets and geopolitical effects from the Middle East conflict. Even so, the region is expected to remain the fastest-growing among emerging markets. India is a key contributor to this growth, supported by domestic demand and its trade agreements. Meanwhile, AI is reshaping job markets. Between January 2023 and March 2025, job postings requiring AI skills more than doubled, signaling a major shift in what employers need. Generative AI has already led to an estimated 20% drop in monthly job listings for white-collar roles highly vulnerable to automation, affecting business services and IT. While about 7% of South Asian jobs are highly exposed to AI without complementary skills, a larger group of workers, especially moderately educated young people, are at risk.

Trade Deals and AI in Key Sectors

Countries in South Asia are using industrial policies at about twice the rate of other EMDEs, with nearly half focused on manufacturing to boost jobs and wages. However, policies that restrict imports have mostly just cut imports without significantly increasing exports. India's new FTAs with the EU and UK aim to double market access, going beyond tariff cuts to include visa arrangements and agreements on recognizing qualifications. These deals are expected to significantly boost India's GDP and are vital for further growth, especially in export-oriented industries. In the Business Process Outsourcing (BPO) sector, AI adoption creates a mixed picture. Automation is taking over routine tasks, leading to some job cuts at major Indian IT companies attributed to AI. Yet, AI coding tools are making developers more productive and creating demand for new skills. Globally, South Asia's overall exposure to AI in jobs (7% highly exposed) is lower than in other emerging markets (15%). Still, jobs affected by AI contribute substantially to total earnings, making up 42%. Some countries, like Singapore, show how AI can complement jobs and wages, unlike displacement seen in Thailand and Indonesia.

Concerns Over Inequality and Implementation Gaps

Despite active policy efforts and trade liberalization, a major worry is the persistence of wide differences in labor markets within countries. These ongoing disparities mean that the gains from AI boosting productivity and growth from FTAs may not reach all regions or skill groups evenly, potentially worsening existing inequalities. Jobs with high AI exposure, even those that complement AI, have seen slower hiring. For example, a rise in AI exposure is linked to a 1.5% average drop in job postings. Additionally, some South Asian economies have limited capacity to implement policies and face fiscal constraints, which could hinder the effectiveness of industrial strategies. Dependence on imported energy also leaves the region vulnerable to global energy market swings and geopolitical risks. Multinational companies in South Asia have reported slower hiring, partly due to AI adoption by their parent firms abroad.

Path Forward: Reforms for Sustainable Growth

The World Bank stresses that broad policies focusing on infrastructure, skills training, and a better business climate are essential for widespread growth and job creation. These efforts can be enhanced by targeted industrial policies addressing specific market issues, like funding skill development programs and improving export quality. The region's medium-term growth outlook is positive, but it depends on enacting key reforms to maintain momentum, build resilience to economic shocks, and manage the workforce changes brought by AI. Successfully meeting these challenges will need a strategic plan to upgrade worker skills and improve job mobility to harness AI's advantages while minimizing disruptions.